Employee stock option appreciation rights securities auction process

ABSTRACT

An online auction process for derivative securities is used to determine a fair market value of an asset or benefit provided to others, such as employee stock options. In one embodiment, the derivative securities track the intrinsic value realized by employees when exercising the employee stock options granted to them by their employers. The derivative securities may include rules for handling modifications to an employee stock option grant and/or rules for handling forfeitures of some or all of the employee stock options.

Notice: More than one reissue application has been filed for the reissueof U.S. Pat. No. 7,962,397. The reissue applications are U.S. patentapplication Ser. No. 13/372,416 (the present application), which wasfiled on Feb. 13, 2012, and U.S. patent application Ser. No. 13/396,442,which was filed on Feb. 14, 2012 and is a continuation of the presentreissue application.

RELATED APPLICATIONS

This patent application claims priority to U.S. Provisional PatentApplication No. 60/754,375, filed Dec. 28, 2005, U.S. Provisional PatentApplication No. 60/812,269, filed Jun. 9, 2006, and U.S. ProvisionalPatent Application No. 60/828,008, filed Oct. 3, 2006, each of which arehereby incorporated by reference herein in their entirety.

FIELD OF THE DISCLOSURE

This disclosure relates generally to financial securities. Moreparticularly, this disclosure relates to online auctioning of derivativesecurities to bidders, including retail bidders, to determine a value ofa stock option.

BRIEF DESCRIPTION OF THE DRAWINGS

Non-limiting and non-exhaustive embodiments of the disclosure aredescribed, including various embodiments of the disclosure withreference to the figures, in which:

FIG. 1 is a block diagram illustrating the use of tracking instrumentsfor estimating the expense of granting employee stock options accordingto one embodiment;

FIG. 2 is a block diagram illustrating the involvement of a grantortrust to create, issue and auction the tracking instrument of FIG. 1according to another embodiment;

FIG. 3 is a flow chart of certain embodiments for selling rights to aderivative cash flow corresponding to employee stock options;

FIG. 4 is a flow chart of a method for paying holders of trackinginstruments according to one embodiment;

FIG. 5 is a flow chart of a method for auctioning tracking instrumentsaccording to one embodiment;

FIG. 6 is a flow chart of a method for handling modifications toemployee stock options according to one embodiment;

FIGS. 7-10 are flow charts of methods for handling pre-vestingforfeitures of employee stock options according to certain embodiments;

FIG. 11 is a flow chart of various options for registration or exemptionfrom registration for derivative securities; and

FIG. 12 is a block diagram of an example system for auctioning trackinginstruments corresponding to employee stock options according to oneembodiment.

DETAILED DESCRIPTION

Overview of Market-Based Approach to Valuing Employee Stock Options

Disclosed herein is an online auction process for derivative securitiesused to determine a fair market value of an asset or benefit provided toothers. While the derivative securities may correspond to any type ofasset or benefit, certain embodiments disclosed herein are directed toderivative securities that track the intrinsic value realized byemployees when exercising employee stock options granted to them bytheir employers.

An artisan will recognize from the disclosure herein that a “derivativesecurity” is a broad term used herein in its ordinary sense andincludes, for example, a contract that specifies the rights andobligations between an issuer of the derivative security and a holder ofthe derivative security to deliver or receive future cash flows (orother assets or securities) based on some future event. The future eventmay include, for example, the exercise of an employee stock option orother type of option. When used to estimate the value of an asset orbenefit, the derivative security may be referred to herein as a“tracking instrument.” Further, referring to example embodiments thatuse a derivative security to estimate the value of employee stock optiongrants, a derivative security may be referred to herein as an EmployeeStock Option Appreciation Rights Security, or “ESOARS.”

With the promulgation of Statement of Financial Accounting Standards No.123(R) (FAS 123R), the Financial Accounting Standards Board (FASB)requires the expensing of employee stock options (ESOs). However, thereare many features of ESOs that make using conventional option-pricingmodels inappropriate (e.g., a Black-Scholes model). These featuresinclude, for example, the typically long-term nature of ESOs, vestingconditions, nontransferability, nonhedgeability, blackout periods,suboptimal exercise by employees, termination of employees and otherforfeiture features.

To arrive at a more accurate option-pricing estimate than that providedby models, the online auction process for contractual rights to futurepayments disclosed herein parallels the intrinsic value realized byemployees for stock options received from their employers. The purposeis to enable companies to obtain a fair market value of these ESOARS forthe purpose of FAS 123R employee option compensation expense accounting.In one embodiment, the process follows an online public auction format,which is open to all qualified investors, is arms-length, and iscompletely transparent. The ESOARS sold through the auction processprovide cash flows to the investor that are a percentage of intrinsicvalue realized through the exercising of options held by employees.

A market approach that includes a fair and open auction for contractsreturning to investors payments that track intrinsic value realized bygrantees enables a company to determine a fair market value for employeestock options. The market impounds the effects of differences betweenemployee options and regular options and arrives at a fair value. Thisis a more reasonable approach than either using models that do notaccount for all of the features of the instruments or making ad hocadjustments to existing models. Supply and demand forces and investors'self interest drive the price to its true value.

The embodiments of the disclosure will be best understood by referenceto the drawings, wherein like elements are designated by like numeralsthroughout. In the following description, numerous specific details areprovided for a thorough understanding of the embodiments describedherein. However, those of skill in the art will recognize that one ormore of the specific details may be omitted, or other methods,components, or materials may be used. In some cases, operations are notshown or described in detail.

Furthermore, the described features, operations, or characteristics maybe combined in any suitable manner in one or more embodiments. It willalso be readily understood that the order of the steps or actions of themethods described in connection with the embodiments disclosed may bechanged as would be apparent to those skilled in the art. Thus, anyorder in the drawings or Detailed Description is for illustrativepurposes only and is not meant to imply a required order, unlessspecified to require an order.

Embodiments may include various steps, which may be embodied inmachine-executable instructions to be executed by a general-purpose orspecial-purpose computer (or other electronic device). Alternatively,the steps may be performed by hardware components that include specificlogic for performing the steps or by a combination of hardware,software, and/or firmware.

Embodiments may also be provided as a computer program product includinga machine-readable medium having stored thereon instructions that may beused to program a computer (or other electronic device) to performprocesses described herein. The machine-readable medium may include, butis not limited to, hard drives, floppy diskettes, optical disks,CD-ROMs, DVD-ROMs, ROMs, RAMs, EPROMs, EEPROMs, magnetic or opticalcards, solid-state memory devices, or other types ofmedia/machine-readable medium suitable for storing electronicinstructions.

Several aspects of the embodiments described will be illustrated assoftware modules or components. As used herein, a software module orcomponent may include any type of computer instruction or computerexecutable code located within a memory device. A software module may,for instance, comprise one or more physical or logical blocks ofcomputer instructions, which may be organized as a routine, program,object, component, data structure, etc., that performs one or more tasksor implements particular abstract data types.

In certain embodiments, a particular software module may comprisedisparate instructions stored in different locations of a memory device,which together implement the described functionality of the module.Indeed, a module may comprise a single instruction or many instructions,and may be distributed over several different code segments, amongdifferent programs, and across several memory devices. Some embodimentsmay be practiced in a distributed computing environment where tasks areperformed by a remote processing device linked through a communicationsnetwork. In a distributed computing environment, software modules may belocated in local and/or remote memory storage devices. In addition, databeing tied or rendered together in a database record may be resident inthe same memory device, or across several memory devices, and may belinked together in fields of a record in a database across a network.

Tracking Instruments

FIG. 1 is a block diagram illustrating the use of tracking instruments110 for estimating the expense 112 to an employer 113 of grantingemployee stock options 114 (ESOs 114) according to one embodiment.Generally, the ESOs 114 provide a compensation benefit to employees byallowing the employees, after a vesting period 116, to exercise the ESOs114 by purchasing stock (securities) in the employer's company at apredetermined exercise price 118 during an exercise period 120. The ESOs114 are generally subject to many restrictions 122 (e.g.,nontransferability, nonhedgeability, and blackout periods), modification124, and forfeiture 126. As discussed above, conventional option-pricingmodels are inappropriate for the ESOs 114 due to the generally longvesting periods 116, the restrictions 122, and the other features suchas possible modification 124 and forfeiture 126.

Thus, in one embodiment, a market-based approach is used to determinethe value of the ESOs 114 for FAS 123R and/or other financial accountingpurposes. In the market-based approached disclosed herein, the employer113 (grantor) provides the tracking instruments 110 via an onlineauction 128 to retail investors 128. As discussed below, in oneembodiment, the tracking instruments 110 are auctioned at substantiallythe same time (e.g., the same day or before markets open the next day)as the grant 132 of the ESOs 114 to the employees 134, or on another daywhen valuation of the ESOs 114 is desired or required (e.g., by FAS123R).

The tracking instruments 110 comprise contractual rights 136 to futurepayments, rules 138 for handling any modifications 124 to the ESO grant132, and rules 140 for handling any forfeitures 126 of the ESOs 114 bythe employees 134. The rights 136 to future payments are proportional toa value, if any, actually realized by the employees 134 upon exercisingtheir respective ESOs 114. Accordingly, each holder of one or more ofthe tracking instruments 110 will respectively receive a pro rata shareof the net value of the ESOs 114 realized as the employees 134 exercisetheir respective ESOs 114.

The online auction 128 of any amount of the tracking instruments 110 mayresult in a valid fair market value of the ESO grant 132. Just as themarket value of an enterprise is determinable each day based on a smallfraction of the total shares of common stock outstanding exchanged, thetracking instruments 110 may be used to pay investors only a smallproportion of the expenses incurred by the company to thereby measurethe fair market value of the ESO grant 132. However, in order to attracta meaningful number of qualified bidders, the tracking instruments 110according to one embodiment pay holders approximately 10% of the actualintrinsic value of the ESOs 114 that are exercised. An artisan willrecognize from the disclosure herein that other percentages may also beused. For example, in other embodiments, the tracking instruments 110pay holders between approximately 5% and approximately 15% of the actualintrinsic value of the ESOs 110 that are exercised. Further, percentagesbelow 5% and above 15% (e.g., 100%) may also be used.

In one embodiment, approximately one tracking instrument 110 isauctioned for each ESO 114 granted to the employees 134. This providesthe retail investors 130 with a simple one-to-one correspondence betweenthe tracking instruments 110 and the ESOs 114 and allows smallerinvestors 130 to bid on relatively small fractions of the value of theoverall ESO grant 132. However, in other embodiments, a plurality ofESOs 114 is granted for each tracking instrument 110 provided throughthe online auction 128. For example, in one embodiment, approximately100 ESOs 114 are granted for each tracking instrument 110 initially soldto the retail investors 130 because traditional stock options are tradedin units of 100. Of course, an artisan will recognize from thedisclosure herein that any number of ESOs 114 may be granted for eachtracking instrument 110.

In another embodiment, to maintain the notion of one tracking instrument110 approximately equaling one ESO 114, the ratio of trackinginstruments 110 to ESOs 114 is approximately equal to the portion of theactual intrinsic value of the ESOs 114 specified to be paid to theholders of the tracking instruments 110. For example, if the trackinginstruments 110 pay holders approximately 10% of the actual intrinsicvalue of the ESOs 114 that are exercised, then the number of trackinginstruments 110 auctioned approximately equals 10% of the number of ESOs114 provided in the ESO grant 132. In such an embodiment, the valuationof each tracking instrument unit 110 (e.g., the price paid for thetracking instruments 110 through the auction 128) is approximately equalto the expense of each employee stock option in the ESO grant 132 (whichmay be adjusted for factors such as pre-vesting forfeitures, asdiscussed below).

The above example illustrates one embodiment for deriving the expense ofthe ESO grant 132 from a market valuation of the tracking instruments110. The derived expense is based on a particular ratio of trackinginstruments 110 to ESOs 114. An artisan will recognize from thedisclosure herein that the expense of the ESO grant 132 may also bederived for other ratios of tracking instruments 110 to ESOs 114. Inother words, the estimated expense of the ESO grant 132 depends on theratio of tracking instruments 110 to ESOs 114 and the rights to futurepayments 136 provided to holders of the tracking instruments 110. If,for example, there are approximately equal numbers of trackinginstruments 110 and ESOs 114, and the tracking instruments 110 arestructured to pay 5% of the actual intrinsic value of the ESOs that areexercised, then the total value of the tracking instruments 110 (asdetermined by the online auction 128) is approximately 5% of the expenseof the ESO grant 132. As discussed below, the valuation of the trackinginstruments 110 may be adjusted for factors such as pre-vestingforfeitures.

Upon completion of the online auction 128, the winning bidders(discussed below) from among the retail investors 130 are notified. Inone embodiment, the tracking instruments 110 are deposited with aDepository Trust Corporation (DTC) and all clearing takes place usingwell-established mechanisms. In another embodiment, the winning biddersare provided with a certificate indicating ownership of their respectivetracking instruments.

There are no restrictions on aftermarket trading or hedging of thetracking instruments. The current holders 142 of the trackinginstruments 110 may be the initial retail investors 130 and/oraftermarket investors (not shown). The retail investors 130 whopurchased the tracking instruments 110 through the online auction 128may either hold their respective tracking instruments 110 or may resellall or a portion of their respective tracking instruments 110 to theaftermarket investors.

For example, in one embodiment, the website used to initially auctionthe tracking instruments 110 may also be used to create a secondarymarket where current holders of the tracking instruments 110 may auctionor otherwise sell their respective interests in the ESO grant 132. Eachtracking instrument 110 may be assigned a CUSIP (Committee on UniformSecurities Identification Procedures) number at issue and the employer113 (or a bank or auction agent) may work with TRACE (Trade Reportingand Compliance Engine) and/or other transaction data providers to recordand disseminate post-auction tracking instrument 110 trade data.

As the employees 134 exercise their respective ESOs 114 after thevesting period 116, the actual value 144 realized by the employees 134is determined. As discussed in detail below, the actual value 144realized by the employees 134 depends on the number of ESOs 114 thatvest, whether the trading price of the employer's underlying securitiesexceeds the exercise price 118, and the number of ESOs 114 that theemployees 134 choose to exercise during the exercise period 120.Further, the actual value 144 may depend on the rules 138 for handlingany modifications 124 to the ESO grant 132 and/or the rules 140 forhandling any forfeitures 126 of the ESOs 114 by individual employees134.

Periodically, as the employees 134 exercise the ESOs 114, the currentholders 142 of the tracking instruments 110 are paid 146 thepredetermined portion of the actual value 144 realized by the employees134. Again, the predetermined portion is specified by the rights 136 tofuture payments in the tracking instruments 110. Thus, by way ofexample, if the rights 136 specify 10% of the actual value 144 realizedby the employees 134, then the current holders 142 of the trackinginstruments 110 would each receive a pro rata share of 10% of the actualvalue 144, depending on each of the holders 142 respective share of thetracking instruments 110.

In one embodiment, the employer 113 directly creates, issues, and sells,to the retail investors 130, the tracking instruments 110. However, asshown in FIG. 2, in another embodiment, the employer 113 grants 208 allrights 136 to the future cash flow to a grantor trust 210, which in turncreates and issues 212 the tracking instruments 110 of FIG. 1. Thegrantor trust 210 performs the online auction 128 to sell the trackinginstruments 110 to the retail investors 130. As discussed above, theretail investors 130 may hold or resell their respective trackinginstruments 110. The grantor trust 210 auctions 128 the trackinginstruments 212 on or near the same day as the ESO grant 132, or at suchother time as desired or required to determine the value of the ESOgrant 132.

The employer 113 tracks the exercise of the ESOs 114, forfeited ESOs114, and modifications to the ESO grant 132, and provides this trackinginformation to the grantor trust 210. The grantor trust 210 uses thisinformation, as discussed herein, to provide pro rata payments to thecurrent holders 142 of the tracking instruments 110 in proportion to theactual value, if any, realized by the employees 134 for the ESOs 114.

By way of summary, FIG. 3 is a flow chart of certain embodiments forselling rights to a derivative cash flow corresponding to ESOs.Initially, the employer or grantor of the employee stock optionsestablishes 308 a derivative cash flow, which proportionately matchesthe economic benefit that will be realized by each employee as theyexercise their stock options. As discussed above, it is currentlyanticipated that the proportion will be from approximately 5% toapproximately 100%. However, other proportions may be used.

As discussed above, this process may be carried out in two possiblevariations. First, in the trust variation, the employer grants 310 allrights in the cash flow to a grantor trust, which in turn will create,issue, and sell to securities purchasers derivative securities of thegrantor trust that represent undivided interests in the cash flow.

Second, in the direct variation, the employer creates 315, issues, andsells, to securities purchasers, derivative securities of the employerrepresenting undivided interests in the cash flow.

The payment 320 of cash flow as employees exercise their stock optionsmay also vary depending on the variation of the process. In the trustvariation, the employer makes 325 a payment proportional to the economicbenefit realized by the employee to the grantor trust, which the grantortrust will in turn distribute 325 proportionately to the holders of thegrantor trust's derivative securities.

In the direct variation, the employer makes 330 payment proportional tothe economic benefit realized by the employee directly to the holder ofthe employer's derivative securities.

The sale 335 of derivative securities may also vary. In one embodiment,an auction may be held. The auction may be 340 a Dutch auction, amodified Dutch auction, or other type of auction. These may includepaper bids, e-mail bids, electronic bidding platforms, or other types ofbidding platforms.

In an alternative embodiment, some other form of offering or placement,public or private, may be employed 345.

Determining Payments to Holders of Tracking Instruments

FIG. 4 is a flow chart of a method 400 for paying holders 142 oftracking instruments 110 according to one embodiment. Payments are made,according to certain embodiments, either monthly, quarterly,semi-annually, annually, or on some other predetermined periodic basis.For example, in one embodiment, current holders 142 of trackinginstruments 110 are paid quarterly as this frequency strikes a goodbalance between payment processing costs and liquidity concerns for theholders 142. A quarterly payment schedule is also similar to the paymentfrequency for equity securities (dividends).

The method 400 includes determining 410 a number of vested ESOs 114exercised by employees 134 during a particular time period to purchaseunderlying securities at respective exercise prices 118. The particulartime period may be a portion of the exercise period 120. The method 400also includes determining 412 trading prices of the underlyingsecurities (the employer's stock) at the respective exercise times. TheESOs 114 may be exercised on different days or times during theparticular time period. Thus, the method 400 tracks trading prices aseach of the ESOs 114 are exercised.

For each of the ESOs 114 exercised during the particular time period,the method 400 calculates 414 the value, if any, actually realized bythe employees. The value is equal to an amount by which the respectivetrading prices of the underlying securities at the respective exercisetimes exceed the exercise price 118 of the exercised ESOs 114. Then, foreach of the ESOs 114 exercised during the particular time period, themethod 400 pays 416 the current holders 142 of the tracking instruments110 a pro rata share of the predetermined percentage of the calculatedvalue specified by the tracking instruments 110. The pro rata share isbased on the number of tracking instruments 110 held by each of thecurrent holders 142.

Online Auction

As discussed above, the tracking instruments 110 may be priced andallocated using an online auction process through a website. The auctionmay be analogous to municipal bond auctions that some banks operate forthe public sale of municipal bonds. Details of upcoming auctions for thetracking instruments 110 are distributed in advance to known potentialbidders. Public notices may also be given to the financial press. In oneembodiment, the information provided to potential investors does notinclude an expected price range or overall maximum bid price. Suggestedbid ranges and/or maximums generally interfere with the fair and opendetermination of the fair value by unduly influencing or otherwiselimiting bidders with respect to pricing.

FIG. 5 is a flow chart of a method 500 for auctioning trackinginstruments 110 according to one embodiment. After starting 510 theonline auction, an application server of an auction website receives 512bids for tracking instruments 110 corresponding to ESOs 114 of aparticular ESO grant 132. In one embodiment, early bids may also bereceived from bidders before the start 510 of the online auction. Thus,investors who may otherwise be unavailable during the auction period mayparticipate in the auction by submitting early bids. In one embodiment,an early bid form may be downloaded from the auction website andsubmitted via, for example, the auction website, email, fax or letter.

The tracking instruments 110 are relatively complex and risky securitiesthat do not have direct analogs in the marketplace frequented by mostinvestors. Therefore, in one embodiment, bidders are requested to openan account and/or make a deposit. The bidders may also be prescreened tofilter out investors for which the tracking instruments 110 are lesslikely to be suitable. In one embodiment, potential bidders are providedwith a suitability questionnaire, such as a NASD (National Associationof Securities Dealers) suitability questionnaire, when applying for abrokerage account. The questionnaire asks potential bidders to identify,for example, their risk tolerance, investment time horizon, andinvestment objectives. In one embodiment, investors who agree that theyhave high risk tolerance, a moderate or long investing time horizon andchose speculative trading as one of their investment objectives areallowed to bid for the tracking instruments 110.

In addition to these questions, potential bidders may be probed todetermine their understanding of the risks of purchasing the trackinginstruments 110. For example, in one embodiment, potential bidders areasked how much they are willing to invest and how much they were willingto lose. The minimum of these two answers is used to set a maximum bidamount. In addition, or in other embodiments, potential bidders may beasked how much they could lose on a $100,000 investment in the trackinginstruments 110. If the investor does not answer $100,000, they arecontacted to determine whether they understand the nature of the risksof investing in the tracking instruments 110.

In one embodiment, the server identifies bidders only by a bidder numberthat changes with each auction and is not tied to any personallyidentifiable information. Thus, the bidders' identities are protected.Once a bid has been submitted, it cannot be lowered or retracted.

In one embodiment, each bidder may place up to five (or anotherpredetermined number) separate, concurrent bids that are eachindependent of the other. Each of the bids corresponding to a particularbidder may be made for a different numbers of tracking instruments 110and for different bid prices. In one such embodiment, a bidder will notbe able to place an individual bid that exceeds that bidder's maximumbid amount. Thus, a bidder who has one active bid will be able to bid upto her/his maximum bid amount in that one bid. However, a bidder whohas, for example, three active bids will be able to bid up to her/hismaximum bid amount for each individual bid. However, the bid of a bidderwho has placed multiple bids may be deemed to be “in the money” (asdiscussed below) only to the extent that the aggregate value of themultiple bids is less than or equal to that bidder's maximum bid amount.In short, while a bidder may place multiple bids, each up to her/hismaximum bid amount, the most tracking instruments 110 that an “in themoney” bidder may be allocated will be that number that his maximum bidamount will purchase.

After receiving bids for at least as many tracking instruments 110 asare being offered, the server determines 514 a current market-clearingprice, defined as the highest price at or above which all of thetracking instruments 110 for the ESO grant 132 may be sold based oncurrent bids. To determine the current market-clearing price, the servermoves down a list of bids in descending order of price until the totalquantity of tracking instruments 110 bid for is at least as large as thenumber of tracking instruments 110 being sold. For example, assume that100,000 tracking instruments 110 are being offered and bids have beenreceived from bidders A, B and C according to the table below:

No. of Tracking Instruments Bidder Requested in Bid Bid Price/TrackingInstrument A 50,000 $100.00 B 50,000 $75.00 C 50,000 $50.00

In this example, $100.00 is not the market-clearing price because only50,000 of the 100,000 tracking instruments 110 offered can be sold forat least $100.00. Further, $50.00 is not the market-clearing pricebecause, although all of the 100,000 tracking instruments 110 could besold for $50.00 or more, $50.00 is not the highest price at which all ofthe tracking instruments 110 can be sold. Instead, the highest price atwhich all of the offered tracking units 110 may be sold in this exampleis $75.00. Thus, the current market-clearing price is set at $75.00 and,were the auction to end at this point, 50,000 tracking instruments wouldbe sold to bidder A for $75.00 each and 50,000 tracking instrumentswould be sold to bidder B for $75.00 each.

In one embodiment, the server displays 516 the current market-clearingprice to the bidders through the website. Thus, at any point in timeduring the auction, the bidders can observe the price at which themarket would clear at that point in time. The current market-clearingprice may be displayed on a bid page of the website and users may needto refresh the page, or the page may be refreshed automatically, to viewthe most current market-clearing price. The displayed currentmarket-clearing price provides an indication of the auction's progress.However, as discussed below, the displayed current market-clearing pricemay be different than a final market-clearing price at which all of theoffered tracking instruments 110 are sold.

Unlike sealed-bid auctions used, for example, by the U.S. Treasury, themethod 500 provides an open auction that provides feedback to thebidders and allows them to raise their bids during the course of theauction. In one embodiment, the feedback provides an indication to abidder as to whether or not the bidder's current bid is “in the money.”If the current bid is in the money, the bid would be a winning bid ifthe auction were to end at that time. Thus, the online auction providesan active, dynamic market that ensures that at a fair market value isattained.

The server then queries 518 whether there is time remaining in theauction period. In one embodiment, the auction period is in a rangebetween approximately thirty minutes to approximately 5 days. In anotherembodiment, the auction period is approximately 30 hours. In anotherembodiment, the auction period is set to be the time between the closeof a securities trading market (such as the New York Stock Exchange) onone day and the open of the market on the next day. However, an artisanwill recognize from the disclosure herein that many different auctionperiods may be used and may be based on such factors as investorattention span and investor availability.

If there is time remaining in the auction period, the server continuesto receive 512 bids through the website, determine 514 the currentmarket-clearing price based on current bids, and display 516 the currentmarket-clearing price through the website. After the auction periodends, the server sets 520 the current market-clearing price as the finalmarket-clearing price at which all of the offered tracking instruments110 are sold. The server then allocates 522 the tracking instruments tothe winning bidders and ends 524 the online auction. As illustrated inthe example above, the bidders A and B would each receive 50,000tracking instruments 110 at a price of $75.00 each.

In one embodiment, bids above the final market clearing price areallocated their entire respective quantities of requested trackinginstruments 110. If only one bid is at the final market-clearing price,the bidder is awarded all of the remaining tracking instruments 110. Ifmultiple bids are at the final market-clearing price, the serverallocates the remaining tracking instruments 110 to the tied bidders ona pro rata basis according to the quantity bid. For example, assumeagain that 100,000 tracking instruments 110 are offered, and that thefollowing bidders (D, E and F) have bid as follows:

No. of Tracking Instruments Bidder Requested in Bid Bid Price/TrackingInstrument D 50,000 $100.00 E 50,000 $75.00 F 50,000 $75.00

In this example, $75.00 is the market-clearing price because it is thehighest price at which all of the tracking instruments 110 may be sold.Therefore, the servers allocates 50,000 tracking instruments 110 tobidder D for $75.00 each. This leaves 50,000 tracking instruments to beallocated to bidders E and F. Because bother bidders E and F requested50,000 tracking instruments 110, they will each be awarded 25,000tracking instruments 110 for $75.00 each.

If on the other hand, bidder E had requested 60,000 tracking instruments110 and bidder F had requested 30,000 tracking instruments, then bidderE would have received twice (approximately 33.333) as many of theremaining tracking instruments 110 as bidder F (approximately 16.667).In one embodiment, fractional tracking instruments are rounded up to thenext whole unit. Thus, in this example, bidder E would receive 34tracking instruments 110 for $75.00 each and bidder F would receive 17tracking instruments 110 for $75.00 each. While this rounding upslightly increases the number of tracking instruments 110 sold, thetracking instrument 110 is designed so that the payment received foreach unit is substantially unaffected.

Handling Modifications to an Original ESO Grant

A modification to an ESO grant 132 can occur under a variety ofcircumstances including, for example, repricing or repurchase of awards,adjustment of the term of the vesting period 116, adding reloadfeatures, and allowing transferability. Applicable accounting rules mayrequire that the modification be treated as an exchange of the originalaward for a new award of equal or greater value. In order to determinethe expense of a modification, the old and the new ESOs 114 are valuedat the time of the modification. The disclosed process for creating andauctioning tracking instruments 110 can easily measure the value of thenew ESOs 114 using a new auction of new tracking instruments 110.

However, the valuation of the original ESOs 114 that are being cancelledcannot be accomplished through the disclosed auction process becausethere will not be any remaining intrinsic value to be realized. FAS 123Rstates that in the absence of a market price, a model should be used.Further, paragraph A23 states that “[t]he valuation technique . . .should be used consistently and should not be changed unless a differentvaluation technique is expected to produce a better result.” Since amarket value is unattainable, an appropriately designed model mayproduce a better result. Since the holders of the original trackinginstruments 110 receive a payment equal to their share of thecancellation value of the original ESOs 114, the determination of thevalue of the original ESO grant 132 may be made by an independent agentdesignated in the initial offering of the tracking instruments 110.

FIG. 6 is a flow chart of a method 600 for handling modifications toESOs 114 according to one embodiment. The method 600 includes granting610 the ESOs 114 and auctioning 612 the tracking instruments 110, asdiscussed above. The method 600 allows 614 modification to the originalESO grant and treats 616 the modification as a cancellation of theoriginal grant.

In one embodiment, the method 600 compensates 618 the current holders142 of the original tracking instruments 110 with a pro rata share ofthe cancellation value of the original grant. The original auction 128received bids on the rights 136 to cash flows that mirror the intrinsicvalue realized by the employees 134 from exercise of their respectiveESOs 114. When the original ESOs 114 are replaced, the original expectedcash flows are eliminated. FAS 123R argues that the issuing company isrepurchasing the original instrument. Thus, according to thisembodiment, the issuing company repurchases the cash flows that wouldhave accrued to the current holders 142 of the original trackinginstruments 110 based on a model valuation performed by an independentagent.

The method 600 then estimates 620 the value of the new or modified ESOs114 by auctioning new tracking instruments 110 corresponding to themodified ESOs 114, as discussed in detail herein.

Handling Pre-Vesting Forfeitures

Under FAS 123R, the final total expense recognized for the ESO grant 132over the vesting period 116 is the grant-date value per ESO 114multiplied by the number of ESOs 114 that actually vest. For accountingpurposes, the total expense is trued up over the vesting period toreflect only options that vest. In order to align payments for thetracking instruments 110 with the total expense, the ESOs 114 that areforfeited before they vest are not included in the total expense.

Investors 130 in the tracking instruments 110 purchase the right 136 topayments that are based on the entire ESO grant 132, including any ESOs114 granted that do not vest. Thus, in one embodiment disclosed below,an expected pre-vesting forfeiture rate is disclosed to potentialbidders for consideration in the bidding process and then the impliedESO grant valuation is backed out of the market value of the ESO grantderived from the auction of the tracking instrument 110. The number oftracking instruments 110 offered may be based on the expectedpre-vesting forfeiture rate. In other embodiments disclosed below, thetracking instruments 110 are designed to remove pre-vesting forfeiturefrom consideration by the potential bidders.

FIG. 7 is a flow chart of a method 700 for handling pre-vestingforfeitures of ESOs 114 according to one embodiment. The method 700provides 710 an anticipated pre-vesting forfeiture rate to potentialbidders in pre-auction offering documentation. The disclosure of thisestimated rate allows the potential bidders to incorporate theanticipated pre-vesting forfeiture rate into their bid prices. Based onthe anticipated pre-vesting forfeiture rate, the method 700 determines716 the estimated fraction of ESOs 114 that will be forfeited beforevesting.

The method 700 then backs out 718 the implied valuation effect of theestimated forfeiture rate on each of the tracking instruments 110 andaccordingly adjusts the final total expense recognized for the ESO grant132. This is done by dividing the tracking instrument valuation obtainedin the auction process by the estimated fraction of ESOs 114 that willvest. The tracking instrument valuation is then converted into avaluation of the underlying ESO 114, which can then be used to measureaccounting expense.

For example, assume that the tracking instruments 110 are auctioned for$7.50 each. Also assume that the bidders were given an estimated ESOforfeiture rate of 12.5%, which implies that 87.5% of the ESOs 114 areexpected to vest. Dividing the auction-determined price of the trackinginstruments ($7.50) by the estimated fraction of ESOs 114 expected tovest (0.875) gives a tracking instrument valuation adjusted forpre-vesting forfeitures of approximately $8.57.

FIG. 8 is a flow chart of a method 800 for handling pre-vestingforfeitures of ESOs 114 according to another embodiment. The method 800provides 810 an anticipated pre-vesting forfeiture rate to potentialbidders in pre-auction offering documentation. However, the method 800also structures 812 the tracking instruments 110 to compensate therespective holders for actual deviations from the anticipatedpre-vesting forfeiture rate. Thus, potential bidders do not need toconsider payment for ESOs 114 that do not vest. The final totalvaluation of the tracking instruments 110 is the market-clearing priceper tracking instrument 110 times the number of tracking instruments 110auctioned. The final total valuation of the tracking instruments 110 isthen used to derive the final total expense recognized for the ESO grant132, as discussed above.

After granting 814 the ESOs 114 and auctioning 816 the trackinginstruments 110 through the website, as discussed above, the method 800determines 818 the number of ESOs 114 that are forfeited before vesting.The method 800 then adjusts 820 the rights 136 to future payments madeto holders of the tracking instruments based on the difference betweenthe anticipated pre-vesting forfeiture rate and the actual number ofESOs 114 forfeited before vesting.

For example, assume that the anticipated pre-vesting forfeiture rate is10% and the actual pre-vesting forfeiture rate is 15%. Payments to thecurrent holders 142 of the tracking instruments 110 is 90/85 of theexpected payments, which provides approximately $1.06 for every dollarinitially expected to be paid (based on the anticipated pre-vestingforfeiture rate) to the current holders 142 of the tracking instruments110.

FIG. 9 is a flow chart of a method 900 for handling pre-vestingforfeitures of ESOs 114 according to another embodiment. In thisembodiment, the anticipated pre-vesting forfeiture rate is not provided910 to the potential bidders and the tracking instruments 110 arestructured 912 to refund the original market-clearing price of thetracking instrument (plus interest) for the fraction of ESOs 114 that donot vest. Thus, the bidders are made whole for the fraction of ESOs thatdo not vest and therefore do not need to take pre-vesting forfeituresinto account when submitting bids.

After granting 914 the ESOs 114 and auctioning 916 the trackinginstruments 110 through the website, as discussed above, the method 900determines 918 the number of ESOs 114 that are forfeited before vesting.The method 900 then refunds 920 the market-clearing price at which thetracking instruments were sold and a predetermined rate of interest torespective holders 142 of the tracking instruments 110 for the pro ratashare of the tracking instrument represented by each ESO 114 forfeitedbefore vesting. In one embodiment, the refund payments are madeperiodically (e.g., quarterly) during the vesting period 116 as the ESOs114 are forfeited. Thus, the pre-vesting forfeitures are removed fromthe bidders' consideration so that they only bid on and receivedistributions for units that actually vest.

FIG. 10 is a flow chart of a method 1000 for handling prevestingforfeitures of ESOs 114 according to another embodiment. Among otherthings, the method 1000 overcomes a problem of paying the currentholders 142 too much during the vesting period 116. The method 1000provides 1010 an anticipated pre-vesting forfeiture rate to potentialbidders in pre-auction offering documentation and selects 1012 thenumber of offered tracking instruments 110 based on the anticipatedpre-vesting forfeiture rate.

If the estimated number of vesting ESOs 114 (based on the pre-vestingforfeiture rate) differs from the number of ESOs 114 that actuallyvests, a different number of reference options will be available forexercise than was anticipated by bidders. Therefore, the payments tobidders are adjusted up or down so that the payment they receive will bethe same as if the estimated number of ESOs 114 is actually realized.This eliminates or reduces the need for bidders to consider pre-vestingforfeitures in their estimation of the value of the tracking instruments110.

Total payments made to the current holders 142 of the trackinginstruments 110 over the life of the reference ESOs 114 is computed, inone embodiment, as the cumulative net realized value from the exerciseof the reference ESOs 114 by the employees 134, multiplied by the prorata share of the net realized value defined by the tracking instruments110, multiplied by the percentage of the reference ESOs 114 that areexpected to vest, divided by the percentage of the reference ESOs 114actually vested.

Since the fraction of the reference ESOs 114 that will actually vest isnot known and will not be known until the vesting period 116 has passed,payments to the current holders 142 of the tracking instruments 110 willbe computed using different formulas during the vesting period 116 andafter the vesting period 116. This is done to ensure that payments madeduring the vesting period 116 do not exceed the payments that should bemade based on the above formula.

For example, if a higher percentage of the reference ESOs 114 vestedthan was anticipated, according to the above formula, payments to thecurrent holders 142 would need to be reduced. However, for example, ifno reference ESOs 114 were exercised subsequent to the vesting period116, there would not be an opportunity to reflect in payments to thecurrent holders 142 the higher-than-anticipated vesting rate. The finalpayment made to the current holders 142 for the reference ESOs 114exercised during the vesting period 116 will reflect the actual vestingrate so that the above formula holds for the vesting period 116.

Thus, after granting 1014 the ESOs 114 and auctioning 1016 the trackinginstruments 110 through the website, as discussed above, the method 1000queries 1018 whether the vesting period 116 has ended. If the vestingperiod 116 has not ended, the method makes 1020 payments to the currentholders 142 of the tracking instruments 110 based only on the number ofreference ESOs 114 that have actually vested relative to the maximumnumber of ESOs 114 that could have vested and the number of ESOs thatare expected to vest according to the anticipated pre-vesting forfeiturerate.

In other words, the payments to the current holders 142 during thevesting period 116 is computed as the net realized value from theexercise of the reference ESOs 114 by the employees 134 during thevesting period 116, multiplied by the pro rata share of the net realizedvalue defined by the tracking instruments 110, multiplied by thepercentage of the reference ESOs 114 that are expected to vest duringthe vesting period 116, multiplied by the maximum number of referenceESOs 114 that could have vested had there been no forfeitures during thevesting period 116, divided by the actual number of reference ESOs 114that have vested during the vesting period 116.

Using the above formula during the vesting period 116, there may be aslight difference between what was paid and the total payment formulaset forth above, evaluated at the end of the final vesting period. Thus,after the vesting period 116, the method 1000 adjusts 1022 the paymentsmade to the current holders 142 made during the vesting period 116 toaccount for the total ESOs 114 actually vested. Following the vestingperiod, payments to the current holders 142 are computed as the netrealized value from the exercise of the reference ESOs 114 by theemployees 134, multiplied by the pro rata share of the net realizedvalue defined by the tracking instruments 110, multiplied by thepercentage of the reference ESOs 114 that are expected to vest, dividedby the percentage of the reference ESOs 114 actually vested.

Grant Date

FAS 123R requires the valuation of ESOs 114 on the grant date. This isthe date the details of the plan are communicated to and accepted byemployees. An issue that might arise is the desirability and/ornecessity of publishing to potential bidders the details of the plan inadvance of the grant date so that the auction can take place on thegrant date. However, if the details of the plan are conveyed topotential bidders, they would likely find their way into the publicdomain and to the employees 134. The standard also notes that the grantdate cannot occur until the plan is approved by the board of directors,if so required. Companies may be encouraged to make this a requirementin certain embodiments. In one embodiment, the auction may be held afterthe stock market closes on the grant date and before it opens on thefollowing day. This may be done to avoid prematurely publishing topotential bidders the details of the ESO grant plan.

FAS 123R defines the grant date as the date when the employer 113 andthe employees 134 have a mutual understanding of the key terms andconditions of the grant. One of the key terms may be the exercise price118 of the ESOs 114. Paragraph A78 of FAS 123R indicates that theexercise price 118 must be known for the grant to have occurred. Thus,in one embodiment, the grant date and the auction date may be aligned bydelaying the setting of the exercise price 118 until the auction date.

Offering Memorandum/Prospectus

In certain embodiments disclosed herein the employer 113 provides anoffering memorandum/prospectus to potential investors in the trackinginstruments 110. The offering memorandum/prospectus provides potentialinvestors with available information to estimate the value of thetracking instruments being offered. The memorandum may include suchdetails as the number of ESOs 114 being granted, service and performanceconditions (as defined by FAS 123R), relevant dates, number and types ofemployees receiving options, post-vesting cancellations, and otheruseful investment information, broken down into incentive andnon-qualified categories. The memorandum may be posted on the Internetand/or a system such as Bloomberg that is available to qualifiedinvestors.

As discussed above, the memorandum may also include the employer'sexpectation for the number of options that will be exercised as well ashistorical data supporting that expectation. Estimates for pre-vestingforfeitures may include, for example, information on the number ofoptions that are incentive versus non-qualified.

In one embodiment, a document such as a prospectus supplement maysummarize information and graphs showing the exercise pattern of theemployees 134 for past option grants. For those bidders wanting tocomplete a more detailed analysis of exercise patterns, free writingprospectuses or other such documents may be provided with theexercise-by-exercise data that underlies the summarized information. Thedetailed and summarized information may be made available on the SECEdgar web site.

In addition to providing information potentially useful to prospectivebidders for valuation purposes, the information distribution plan mayhave the secondary objective of informing a sufficient number of biddersof the opportunity to participate in the tracking instruments auction.In order to ensure competitive pricing, a sufficient number of biddersmay or should be brought into the auction process. For a market-clearingprice to be used to determine fair market value, the FASB requires thatthe price be derived from an active market. Thus, in one embodiment, asmany bidders as possible are attracted through national and localadvertising, press releases, working with reporters from nationalpublications in order to get news articles published, and personalcontact with known potential bidders.

Registration of Derivative Securities

In one embodiment, the tracking instruments 110 are issued under Rule144A under the Securities Act of 1933 and are available to the qualifiedretail investors 130. Alternatively, the tracking instruments 110 may beregistered securities. For example, a company could offer trackinginstruments 110 through a fully registered offering, such as under theissuing company's WKSI (Well Known Seasoned Issuer) shelf registrationwith the SEC. The issuing company could participate in the offering oftracking instruments 110 for third party issuers, but could,alternatively, offer them directly to purchasers itself.

FIG. 11 is a flow chart of various options 1100 for registration orexemption from registration for derivative securities (e.g., thetracking instruments 110). As illustrated, one option 1110 is for thederivative securities to be registered or exempted from registration.For example, the derivative securities may be fully federally registered1112. Alternatively, the derivative securities may qualify 1114 for someexemption to Federal registration, such as a Rule 144A offering 1116 toQualified Institutional Buyers (QIBs), a Reg. D private placement 1118,or qualifying 1110 under another type of exemption.

Example Auctioning System

FIG. 12 is a block diagram of an example system 1200 for auctioningtracking instruments 110 corresponding to ESOs 114 according to oneembodiment. The example system 1200 includes an auction agent module1210 in communication with one or more employer systems 1212 (one shown)and a plurality of investor systems 1214 (three shown) through a network1216. The illustrated components may be implemented using any suitablecombination of hardware, software, and/or firmware.

The network 1216 may include, for example, the Internet or World WideWeb, an intranet such as a local area network (LAN) or a wide areanetwork (WAN), a public switched telephone network (PSTN), a cabletelevision network (CATV), or any other network of communicatingcomputerized devices.

The auction agent module 1210 includes a server 1218 and a trackinginstruments database 1220. An artisan will recognize from the disclosureherein that the server 1218 and the tracking instruments database 1220can be implemented on one or more computers. Further, the employersystem 1212 and the investor systems 1214 may include computers tocommunicate through the network 1216. These computers, may besingle-processor or multiprocessor machines and may include memoryhaving software modules or coded instructions for performing theprocesses described herein.

The server 1218 is configured to create, issue, and auction trackinginstruments 110 to the investor systems 1214 through a website, asdisclosed herein. The server 1218 also provides ESO grant 132 valuationand determines payments to the current holders 142 of the trackinginstruments 110, as disclosed herein. Thus, the tracking instrumentsdatabase 1220 includes information used for performing the methodsdiscussed herein. Such information may include, for example, identityand contact information of the current holders 142 and records of theterms provided by the tracking instruments 110. The database 1220 mayalso include information related to the corresponding ESOs 114 such aspre-vesting forfeiture information, post-vesting forfeiture information,and modification information.

As discussed above, the server 1218 may also facilitate an aftermarketfor the tracking instruments 110 that the server 1218 initially auctionsto the investor systems 1214. Thus, the server 1218 may provide awebsite selling or auctioning platform for the investor systems 1214 tosell their respective tracking instruments 110 initially purchasedthrough the online auction from the employer system 1212 or a grantortrust system (not shown), to third party investors. The server 1218 mayalso provide cross trades between the initial investor systems 1214. Forexample, a large holder of the tracking instruments 110 may want todivest its holdings by scheduling and running an auction through thewebsite provided by the server 1218.

The auction agent module 1210 may be provided for example, by a thirdparty auctioning agent, the employer system 1212, or a bank. A bank, forexample, may take on several roles in creating, issuing, auctioning, andmanaging the tracking instruments 110, as disclosed herein. For example,a bank may: act as a financial consultant to advise the employer system1212 on the details of the structure of the contracts and the auctionprocess; hold the auction or act as an auction agent or placement agentfor the tracking instruments; provide trust services for the collectionand distribution of cash flows, such as in the capacity of trustee,transfer agent, or paying agent; provide the current holders 142 of thetracking instruments 110 and the marketplace a monthly summary of thecurrent vesting, pre-vesting forfeiture, and exercise status of the ESOs114 associated with their respective tracking instruments 110; act as ariskless principal purchaser or underwriter; act as an informationagent; act in some other auxiliary capacity in connection with theissuance, offering, sale, distribution, delivery, registration, payment,and/or transfer of the tracking instruments 110; provide consultingservices to assist in the unwinding of modified ESOs 114, as discussedabove; and/or assist the employer system 1212 in preparing andcirculating an offering memorandum/prospectus regarding the trackinginstruments 110.

While specific embodiments and applications of the disclosure have beenillustrated and described, it is to be understood that the disclosure isnot limited to the precise configuration and components disclosedherein. Various modifications, changes, and variations apparent to thoseof skill in the art may be made in the arrangement, operation, anddetails of the methods and systems of the disclosure without departingfrom the spirit and scope of the disclosure.

1. A method for estimating an expense of employee stock option grants,the method comprising: providing tracking instruments that give holdersof the tracking instruments rights to future payments proportional to avalue, if any, actually realized by grantees of the employee stockoptions upon exercising the employee stock options, wherein the rightsto future payments are independent of current holders of the trackinginstruments such that each current holder of one or more of the trackinginstruments respectively receives a pro rata share of a predeterminedportion of the net value of the employee stock options actually realizedas the grantees of the employee stock options exercise their respectiveemployee stock options; storing information about the trackinginstruments in a tracking instrument database of an auction system, theauction system including a processor to communicate with one or moreinvestor systems through a network; electronically auctioning, using theprocessor of the auction system, the tracking instruments to biddersthrough a website, wherein the auction system receives bids from the oneor more investor systems through the network during the electronicauctioning of the tracking instruments; and deriving the expense ofgranting the employee stock options from a price paid by the bidders forthe tracking instruments.
 2. The method of claim 1, whereinelectronically auctioning the tracking instruments comprises auctioningthe tracking instruments on the grant date of the employee stockoptions.
 3. The method of claim 2, further comprising: delaying thesetting of an exercise price for the employee stock options until thegrant date.
 4. The method of claim 1, further comprising: allowing thebidders to immediately resell their respective tracking instrumentspurchased through the electronic auction.
 5. The method of claim 4,wherein reselling the respective tracking instruments comprises allowingthe bidders to resell their respective tracking instruments through thewebsite.
 6. The method of claim 5, wherein reselling the respectivetracking instruments through the website comprises re-auctioning therespective tracking instruments through the website.
 7. The method ofclaim 1, further comprising: determining that the employee stock optionshave been modified; canceling the original grant of the employee stockoptions; and compensating the holders of the tracking instruments basedon a model valuation.
 8. The method of claim 7, wherein the modelvaluation is performed by an independent agent.
 9. The method of claim7, further comprising: treating the modification as a new grant ofmodified employee stock options; and valuing the modified employee stockoptions by auctioning new tracking instruments for the modified employeestock options.
 10. The method of claim 1, further comprising: providingthe bidders with an estimated pre-vesting forfeiture rate for theemployee stock options before electronically auctioning the trackinginstruments, the rate providing an estimation of a portion of theemployee stock options expected to be forfeited before vesting.
 11. Themethod of claim 10, wherein deriving the expense of granting theemployee stock options comprises removing the portion of employee stockoptions expected to be forfeited before vesting from the derived expenseof granting the employee stock options.
 12. The method of claim 11,wherein removing the portion of employee stock options expected to beforfeited before vesting from the derived expense comprises dividing theauction proceeds per tracking instrument by the fraction of employeestock options expected to vest.
 13. The method of claim 10, furthercomprising: changing the rights to future payments in proportion to adifference between the estimated portion of the employee stock optionsexpected to be forfeited before vesting and an actual number of employeestock options forfeited before vesting.
 14. The method of claim 10,further comprising: during a vesting period, making payments to theholders of the tracking instruments based only on a number of employeestock options actually vested relative to a maximum number of employeestock options that could have vested and a number of employee stockoptions that are still expected to vest.
 15. The method of claim 14,wherein the payments made to the holders of the tracking instrumentsduring the vesting period comprise the value actually realized by thegrantees upon exercising the employee stock options, multiplied by a prorata share of the value actually realized defined by the trackinginstruments, multiplied by a percentage of the employee stock optionsthat are expected to vest, multiplied by the maximum number of employeestock options that could have vested had there been no forfeituresduring the vesting period, divided by the number of employee stockoptions actually vested.
 16. The method of claim 15, further comprising:after the vesting period, adjusting the payments made to the holders ofthe tracking instruments to account for a total number of employee stockoptions actually vested during the entire vesting period.
 17. The methodof claim 1, further comprising: refunding to holders of the trackinginstruments the price paid by the bidders for a portion of the employeestock options that are forfeited before vesting.
 18. The method of claim17, further comprising: paying interest to the holders of the trackinginstruments on the refunded portion of the price paid by the bidders.19. The method of claim 1, further comprising: periodically determininga number of employee stock options exercised by the respective granteesto purchase underlying securities at respective exercise prices;determining the value, if any, actually realized by the grantees of theemployee stock options during a particular period to be an amount bywhich respective trading prices of the underlying securities at the timeof exercise exceed the respective exercise prices, multiplied by therespective number of employee stock options exercised; and paying theholders of the tracking instruments the value, if any, actually realizedby the grantees of the employee stock options during the particularperiod.
 20. The method of claim 1, wherein the rights to future paymentsare in a range between approximately 5% and approximately 15% of thevalue, if any, actually realized by the grantees of the employee stockoptions.
 21. The method of claim 1, wherein the price paid by thebidders for the tracking instruments comprises a single market-clearingprice, based on respective bids, at which all of the trackinginstruments are sold to one or more of the bidders.
 22. The method ofclaim 21, wherein the respective bids of each of the one or more biddersallowed to purchase the tracking instruments are greater than or equalto the market-clearing price.
 23. The method of claim 22, furthercomprising: initially limiting the tracking instruments that areprovided to the bidders through the electronic auction to a fixednumber; and allocating the fixed number of tracking instruments by orderof priority based on respective bid prices.
 24. The method of claim 23,further comprising: if two or more of the bidders submit respective bidsat a same bid price, each greater than or equal to the market-clearingprice, allocating the tracking instruments to the two or more tiedbidders on a pro rata basis according to respective quantities oftracking instruments requested.
 25. The method of claim 21, furthercomprising: displaying a current market clearing price to the biddersduring the electronic auction.
 26. The method of claim 1, wherein thebidders comprise retail bidders.
 27. A system for estimating an expenseof granting stock options, the system comprising: tracking means forproviding rights to future payments proportional to a value, if any,actually realized by grantees of the stock options upon exercising thestock options, wherein the rights to future payments are independent ofcurrent holders of the tracking instruments such that each currentholder of one or more of the tracking instruments respectively receivesa pro rata share of a predetermined portion of the net value of theemployee stock options actually realized as the grantees of the employeestock options exercise their respective employee stock options;auctioning means for selling the tracking means to one or more biddersthrough a website for a first market-clearing price; and means forderiving the expense of granting the stock options from the firstmarket-clearing price.
 28. The system of claim 27, wherein the trackingmeans comprises rules for handling a modification to a first grant ofthe stock options.
 29. The system of claim 28, wherein the rulescomprise: canceling the first grant of the stock options; compensatingholders of the tracking means based on a model valuation of the canceledgrant; treating the modification of the first grant as a second grant ofstock options; and auctioning new tracking means corresponding to thesecond grant.
 30. The system of claim 27, wherein the tracking meanscomprises rules for handling forfeitures of the stock options.
 31. Thesystem of claim 30, wherein the rules comprise: providing the bidderswith an estimated pre-vesting forfeiture rate for the stock optionsbefore selling the tracking means, the rate providing an estimation of aportion of the stock options expected to be forfeited before vesting.32. The system of claim 31, wherein the means for deriving the expenseof granting the stock options removes the portion of stock optionsexpected to be forfeited before vesting from the derived expense ofgranting the stock options.
 33. The system of claim 32, wherein removingthe portion of stock options expected to be forfeited before vestingfrom the derived expense comprises dividing the total proceeds receivedfrom selling the tracking means for all of the tracking means by thenumber of stock options expected to vest.
 34. The system of claim 31,wherein the rules further comprise: during a vesting period, makingpayments to holders of the tracking means based only on a number ofstock options actually vested relative to a maximum number of stockoptions that could have vested and a number of stock options that arestill expected to vest.
 35. The system of claim 34, wherein the paymentsmade to the holders of the tracking means during the vesting periodcomprise the value actually realized by the grantees upon exercising thestock options, multiplied by a pro rata share of the value actuallyrealized defined by the tracking means, multiplied by a percentage ofthe stock options that are expected to vest, multiplied by the maximumnumber of stock options that could have vested had there been noforfeitures during the vesting period, divided by the number of stockoptions actually vested.
 36. The system of claim 35, wherein the rulesfurther comprise: after the vesting period, adjusting the payments madeto the holders of the tracking means to account for a total number ofstock options actually vested during the entire vesting period.
 37. Thesystem of claim 30, wherein the rules comprise: refunding to holders ofthe tracking means the price paid by the bidders for a portion of thestock options that are forfeited before vesting.
 38. The system of claim37, wherein the rules further comprise: paying interest to the holdersof the tracking means on the refunded portion of the price paid by thebidders.
 39. A machine-readable storage medium having program codestored thereon which, when executed by a processor, cause said processorto perform the operations of: providing derivative securitiescorresponding to underlying stock options that give holders of thederivative securities rights to future payments proportional to a value,if any, actually realized by grantees of the stock options uponexercising the stock options, wherein the rights to future payments areindependent of current holders of the derivative securities such thateach current holder of one or more of the derivative securitiesrespectively receives a pro rata share of a predetermined portion of thenet value of the stock options actually realized as the grantees of thestock options exercise their respective stock options; electronicallyauctioning the derivative securities to bidders through a website; andderiving the expense of granting the stock options from a price paid bythe bidders for the derivative securities.
 40. The machine-readablestorage medium of claim 39, wherein electronically auctioning thederivative securities comprises auctioning the derivative securities onthe grant date of the stock options.
 41. The machine-readable storagemedium of claim 40, the program code further causing the processor toperform the operation of: delaying the setting of an exercise price forthe stock options until the grant date.
 42. The machine-readable storagemedium of claim 39, the program code further causing the processor toperform the operation of: allowing the bidders to immediately reselltheir respective derivative securities purchased through the electronicauction.
 43. The machine-readable storage medium of claim 42, whereinreselling the respective derivative securities comprises allowing thebidders to resell their respective derivative securities through thewebsite.
 44. The machine-readable storage medium of claim 43, whereinreselling the respective derivative securities through the websitecomprises re-auctioning the respective derivative securities through thewebsite.
 45. The machine-readable storage medium of claim 39, theprogram code further causing the processor to perform the operation of:determining that the stock options have been modified; canceling theoriginal grant of the stock options; and compensating the holders of thederivative securities based on a model valuation.
 46. Themachine-readable storage medium of claim 45, wherein the model valuationis performed by an independent agent.
 47. The machine-readable storagemedium of claim 45, the program code further causing the processor toperform the operation of: treating the modification as a new grant ofmodified stock options; and valuing the modified stock options byauctioning new derivative securities for the modified stock options. 48.The machine-readable storage medium of claim 39, the program codefurther causing the processor to perform the operation of: providing thebidders with an estimated pre-vesting forfeiture rate for the stockoptions before electronically auctioning the derivative securities, therate providing an estimation of a portion of the stock options expectedto be forfeited before vesting.
 49. The machine-readable storage mediumof claim 48, wherein deriving the expense of granting the stock optionscomprises removing the portion of stock options expected to be forfeitedbefore vesting from the derived expense of granting the stock options.50. The machine-readable storage medium of claim 49, wherein removingthe portion of stock options expected to be forfeited before vestingfrom the derived expense comprises dividing the total auction proceedsfor all of the derivative securities by the number of stock optionsexpected to vest.
 51. The machine-readable storage medium of claim 48,the program code further causing the processor to perform the operationof: changing the rights to future payments in proportion to a differencebetween the estimated portion of the stock options expected to beforfeited before vesting and an actual number of stock options forfeitedbefore vesting.
 52. The machine-readable storage medium of claim 48, theprogram code further causing the processor to perform the operation of:during a vesting period, making payments to the holders of thederivative securities based only on a number of stock options actuallyvested relative to a maximum number of stock options that could havevested and a number of stock options that are still expected to vest.53. The machine-readable storage medium of claim 52, wherein thepayments made to the holders of the derivative securities during thevesting period comprise the value actually realized by the grantees uponexercising the stock options, multiplied by a pro rata share of thevalue actually realized defined by the derivative securities, multipliedby a percentage of the stock options that are expected to vest,multiplied by the maximum number of stock options that could have vestedhad there been no forfeitures during the vesting period, divided by thenumber of stock options actually vested.
 54. The machine-readablestorage medium of claim 53, the program code further causing theprocessor to perform the operation of: after the vesting period,adjusting the payments made to the holders of the derivative securitiesto account for a total number of stock options actually vested duringthe entire vesting period.
 55. The machine-readable storage medium ofclaim 39, the program code further causing the processor to perform theoperation of: refunding to holders of the derivative securities theprice paid by the bidders for a portion of the stock options that areforfeited before vesting.
 56. The machine-readable storage medium ofclaim 55, the program code further causing the processor to perform theoperation of: paying interest to the holders of the derivativesecurities on the refunded portion of the price paid by the bidders. 57.The machine-readable storage medium of claim 39, the program codefurther causing the processor to perform the operation of: periodicallydetermining a number of stock options exercised by the respectivegrantees to purchase underlying securities at respective exerciseprices; determining the value, if any, actually realized by the granteesof the stock options during a particular period to be an amount by whichrespective trading prices of the underlying securities at the time ofexercise exceed the respective exercise prices, multiplied by therespective number of stock options exercised; and paying the holders ofthe derivative securities the value, if any, actually realized by thegrantees of the stock options during the particular period.
 58. Themachine-readable storage medium of claim 39, wherein the rights tofuture payments are in a range between approximately 5% andapproximately 15% of the value, if any, actually realized by thegrantees of the stock options.
 59. The machine-readable storage mediumof claim 39, wherein the price paid by the bidders for the derivativesecurities comprises a single market-clearing price, based on respectivebids, at which all of the derivative securities are sold to one or moreof the bidders.
 60. The machine-readable storage medium of claim 59,wherein the respective bids of each of the one or more bidders allowedto purchase the derivative securities are greater than or equal to themarket-clearing price.
 61. The machine-readable storage medium of claim60, the program code further causing the processor to perform theoperation of: initially limiting the derivative securities that areprovided to the bidders through the electronic auction to a fixednumber; and allocating the fixed number of derivative securities byorder of priority based on respective bid prices.
 62. Themachine-readable storage medium of claim 61, the program code furthercausing the processor to perform the operation of: if two or more of thebidders submit respective bids at a same bid price, each greater than orequal to the market-clearing price, allocating the derivative securitiesto the two or more tied bidders on a pro rata basis according torespective quantities of derivative securities requested.
 63. Themachine-readable storage medium of claim 62, the program code furthercausing the processor to perform the operation of: if the pro rataallocation results in a fractional tracking instrument being awarded toa bidder, rounding the fractional tracking instrument to a wholetracking instrument.
 64. The machine-readable storage medium of claim59, the program code further causing the processor to perform theoperation of: displaying a current market clearing price to the biddersduring the electronic auction.
 65. The machine-readable storage mediumof claim 39, wherein the bidders comprise retail bidders.
 66. The systemof claim 31, wherein the rules further comprise: changing the rights tofuture payments in proportion to a difference between the estimatedportion of the stock options expected to be forfeited before vesting andan actual number of stock options forfeited before vesting.
 67. Themethod of claim 24, further comprising: if the pro rata allocationresults in a fractional tracking instrument being awarded to a bidder,rounding the fractional tracking instrument to a whole trackinginstrument.
 68. The system of claim 27, wherein the auctioning meansincludes means for auctioning the tracking means on the grant date ofthe stock options.
 69. The system of claim 68, further comprising: meansfor delaying the setting of an exercise price for the stock optionsuntil the grant date.
 70. The system of claim 27, further comprising:means for allowing the bidders to immediately resell their respectivetracking means purchased through the auctioning means.
 71. The system ofclaim 29, wherein the model valuation is performed by an independentagent.
 72. The system of claim 27, wherein the means for derivingcomprises rules for: periodically determining a number of stock optionsexercised by the respective grantees to purchase underlying securitiesat respective exercise prices; determining the value, if any, actuallyrealized by the grantees of the stock options during a particular periodto be an amount by which respective trading prices of the underlyingsecurities at the time of exercise exceed the respective exerciseprices, multiplied by the respective number of stock options exercised;and paying the holders of the tracking means the value, if any, actuallyrealized by the grantees of the stock options during the particularperiod.
 73. The system of claim 27, wherein the rights to futurepayments are in a range between approximately 5% and approximately 15%of the value, if any, actually realized by the grantees of the stockoptions.
 74. The system of claim 27, wherein the market-clearing priceis based on respective bids and is a price at which all of the trackingmeans are sold to the one or more bidders.
 75. The system of claim 74,wherein the respective bids of each of the one or more bidders allowedto purchase the tracking means are greater than or equal to themarket-clearing price.
 76. The system of claim 75, wherein the auctionmeans: initially limits the tracking means that are provided to the oneor more bidders through the auction means to a fixed number; andallocates the fixed number of tracking means by order of priority basedon respective bid prices.
 77. The system of claim 76, furthercomprising: if two or more of the bidders submit respective bids at asame bid price, each greater than or equal to the market-clearing price,allocating the tracking means to the two or more tied bidders on a prorata basis according to respective quantities of tracking meansrequested.
 78. The system of claim 77, further comprising: if the prorata allocation results in a fractional tracking means being awarded toa bidder, rounding the fractional tracking means to a whole trackingmeans.
 79. The system of claim 74, wherein the auctioning means displaysa current market clearing price to the bidders during the electronicauction.
 80. The system of claim 27, wherein the one or more bidderscomprise retail bidders.